Why meeting company management matters

Charlie Huggins (CFA) - Fund Manager

30 October 2017

Meeting management teams of the business we invest in is an important part of what Steve and I do. Assessing the financial strength of each businesses will always come first, but it often pays to talk with management face-to-face. These meetings give us the chance to ask the questions we want answers to, as opposed to the questions CEOs want to answer.

Last month we went to London to meet with Chris Bogart, the CEO of our biggest holding, Burford Capital. You can read about why we invested in Burford at launch here. The business operates in the relatively new litigation finance market, which has grown quickly over the last few years.

As a result, Burford has seen rapid growth and take-up of its services. The shares have performed strongly but it’s key for us to stay on top of company operations and the industries surrounding them, especially in a rapidly changing market such as this. Here are the key points from our meeting.

What is driving general market growth?

Law partners have become more comfortable with the concept of litigation finance. This has led to more partners coming to Burford for the first time to fund single lawsuits. Once Burford has a foot in the door with these new clients, they tend to put more business its way and this is now happening with the early adopter partners that Burford signed up a few years ago.

As these lawyers become more comfortable with the benefits of litigation financing they are also returning with more complex cases, such as portfolios of legal claims or recourse financing deals, which has significantly expanded the size of the market.

Has this market growth led to increased competition?

The growth of the litigation finance industry has inevitably attracted new competition as other companies look to get a slice of the action. At the moment this does not seem to be having much impact on Burford because the market is growing so strongly that demand is outstripping supply.

While we would expect competition to build as the industry matures, Burford has established a market leading position where scale and reputation give it big advantages.

What risks does the business face?

One of the biggest risks that Burford faces is that cases go against them. For single cases that go against Burford the likelihood is that it will lose its entire investment in the case, not to mention all the hours that were spent studying and managing the case.

With recent growth into more complex cases like portfolio financing, Burford can not only deploy more capital, but can do so in a lower risk fashion, since the likelihood of every case within the portfolio failing is minimal.

Our view

We were encouraged by Chris Bogart and his analysis of Burford’s position. He is business minded and, as he owns a large equity stake in the business, runs the business in a conservative, long-term manner, which aligns with our investment strategy.

The meeting reinforced the extent of growth opportunities for Burford in the market and it was pleasing to hear that Burford see themselves as an investment business not a lawyers business. The culture is one of teamwork and responsibility, and they focus on securing a return on their investment, not simply ‘winning’ cases. This should bode well for shareholders.

Bunzl

We also took the opportunity to attend Bunzl’s Capital Markets Day towards the end of last month. Bunzl supplies grocers, caterers, cleaners and industrial businesses with items they use but don’t sell. Think Costa coffee cups, pizza boxes, plastic bags, packaging, high-viz jackets. You can read why we think this makes a good investment for the fund here.

Bunzl has huge scale and has historically grown by swallowing smaller rivals, creating healthy returns for investors through mergers and acquisitions (M&A). But for the future, we wanted to know more about how the business adds value to its customers, what its competitive advantage is and why management believe it is unique. Ultimately, these are the elements that ensure customers keep using Bunzl in the years ahead.

How does Bunzl add value to its customers?

There is often a bespoke element to what Bunzl do, particularly for its larger customers which means they become very integrated into a company’s operations. Bunzl can provide the customer with a tailored web platform or they can provide new, innovative products to meet specific needs. For example, creating bespoke takeaway packaging for Wagamama.

Is it not just a question of price?

The cost of the product is only part of the reason businesses outsource to Bunzl. Freeing up storage space (Bunzl products are bulky but with low value), simplifying business operations and improving efficiency are often more important reasons for customers to keep coming back.

What makes Bunzl unique?

A big factor in the historic success of Bunzl is the people. There is a strong entrepreneurial culture within the company, as many of the ex-owners of acquired businesses remain with Bunzl.

Equally, the scale of the business means there seem to be many opportunities for future growth, including increased business from mature market customers and plans to expand into new countries and markets in the Latin America regions.

Our view

Overall, we are confident that Bunzl still has a considerable advantage over the majority of its competition, many of which are small, family-owned businesses lacking the scale and professionalism of Bunzl.

Their service offering clearly adds huge benefits to the end customer, be-it consolidating and simplifying their suppliers and delivery schedules, creating new innovative products or supplying tailored online ordering platforms, and the opportunities for growth are still plentiful.

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